What are Commodities

What are Commodities

Commodities is the most common word for investing, trading, financing, and business. We use this word in daily life. However, many people don’t know what are commodities stands for in different fields.

Here's a quick look at what you'll read

A commodity is an essential commodity used in business that can be exchanged for other similar products.

  • Soft commodities
  • Hard Commodities
  • Energy (oil and gas)
  • Metal (gold, silver, copper, lead, etc.)
  • Agriculture is one of the most important industries (wheat, coffee, livestock, etc.)
  • Producers
  • Speculators
  • Hedgers


Material assets are objects. They are raw commodities, unlike stocks, indices or currencies. A commodity is an essential commodity used in business that can be exchanged for other similar products.

What is commodity trading?

Commodity trading is the exchange of commodities to make money. Traditional commodities include grain, gold, meat, oil, and natural gases.

what are commodities

Commodity pricing affects everything from food to gasoline, plane tickets, jewellery, and clothes you wear.

Cereals (corn), toast (wheat), lattes (coffee), sausages (pork), and doughnuts (sugar) are some of the most common examples.

What are commodities in investing?

Currencies, golds, stocks, and other assets are the type of commodities in investing. Commodities can help investors to get their portfolios. Investors can buy these in many ways, including futures contracts and the spot market, allowing them to choose the type of risk they want to take and how they want to take it.

Classification of commodities

They are mainly characterized into two parts.

Soft commodities

Soft commodities are agricultural products. These are volatile in the short term due to their liability to rising seasonal cycles, weather, and spoilage, all of which can impact prices.

Hard Commodities

We can extract it from other natural resources or mine from the earth. Complex objects are easier to handle and carry than soft ones.

There are three types:

  • Energy (oil and gas)
  • Metal (gold, silver, copper, lead, etc.)
  • Agriculture is one of the most important industries (wheat, coffee, livestock, etc.)


Investors in the energy commodities market should be mindful of the economic slump, production modifications imposed by the Organization of Petroleum Exporting Countries (OPEC), and new technological advancements in alternative energy sources (wind power, solar energy, biofuels, and so on).

The goal of replacing crude oil as a primary energy source can impact market prices for energy products.


what are commodities

Gold, silver, platinum, and copper are examples of metals. Some properties may change the weather depending on the state of the metal form, depending on the property. To be able to trade in wealth is to equal the price for the higher rate value.

Some energy commodities are crude oil, heating oil, natural gas, and gasoline. Oil prices have risen in response to global economic changes and decreased oil production from established oil wells worldwide, as demand for energy-related products has increased when the oil supply has decreased.


Agricultural commodities include corn, soybeans, wheat, rice, cocoa, coffee, cotton and sugar. Grain prices can be highly volatile throughout the agricultural industry’s summer months or during any weather-related transition period.

Population growth, coupled with restricted agricultural supplies, can allow agricultural investors to profit from the rising prices of agricultural goods.

Lean pigs, pork bellies, live cattle and feeder cattle are examples of livestock and meat items.

If you are wondering about its meaning in business, then the products made by agriculture, energy and metals commodities are considered commodities in the business world.

What are the methods available for trading commodities?

After understanding what are commodities, let’s move ahead with methods of trading in the commodities market. There are two methods available for trading:

Spot Market

A spot market is a commodity market for trading financial instruments and commodities for immediate delivery. Delivery is the physical exchange of a financial instrument or commodity for a cash transaction.

As cash payments are processed immediately and assets are physically exchanged, we can call the spot market a cash or physical market.

An example of a spot market trade (NYSE) is when an investor (Mr Jones) wants to acquire 1,000 shares of IBM on the New York Stock Exchange. He will approach his broker to buy the shares at the current market price of $117.60.

At the cost of $117,600, the broker immediately completes the fund’s transfer to the seller. As soon as the money is cleared and received by the seller, ownership of the shares is transferred to Mr Jones.

Futures Market

The futures market is where you can buy and sell contracts. People purchase/sell commodities and do futures contracts for delivery later in the futures market, which is an auction market. Futures are exchange-traded derivative contracts that guarantee the delivery of a commodity at a specified price in the future.

If the price of coffee rises above a specific threshold, the investor keeps the profit. And If the price of green coffee rises above the agreed level, the investor pays the difference, and the roaster receives the coffee at a specific price. If the price of green coffee is less than the agreed rate, the roaster pays the same amount to the investor.

Who can do Commodity Futures Trading?

A commodity futures trader can fall into one of the four different categories.


These are people who manufacture or extract commodities and enter into a futures contract to hedge against price fluctuations in the future.

For example, if you are a coffee farmer and promise to sell your crop at a specific price on a specific day, you will receive a guaranteed income on that date, even if the coffee prices fall.


These traders keep their interest in making profits from changes in commodity prices. They are usually not interested in owning a physical object.


These mid-to-long-term investors hold commodities in their portfolios as a hedge against the decline of other assets. Some equities and bonds move toward commodities in the opposite direction.

For example, in the case of a stock market downturn, investors with a commodity-based portfolio may outperform investors with only a stock-based portfolio, when in the volatile market, gold trading is considered a “safe haven”  investment as it  provides exposure to brokers.

These are companies or individuals who buy and sell commodity contracts on behalf of their clients. A broker is a person or company that acts as a go-between an investor and a securities exchange when a company acts as an agent for a client and charges a commission from the consumer for its services.


You have to understand what are commodities and their use in different markets. Risk is also associated with commodity market. A wheat seller has to store it properly. Otherwise, his wheat may destroy, and he will not be able to earn a significant amount. Similarly, for the person trading in gold, the risk is associated with unexpected events, goverment policies, demand and supply. However, as compared to forex trading, the risk is comparatively less in the commodity market.

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